Americans saw higher income in 2017, but economy may be peaking in 2018

Chinese laborers work on bicycle parts. Trade tension with Beijing is adding additional risk to the U.S. economy.

Photo: Getty Images

The good news first: Americans saw a 1.8 percent raise last year, when adjusted for inflation, and median household income reached an all-time high of $61,372.

The bad news: The economy may be running out of steam.

Admittedly, most people would shrug at a 1.8 percent increase in income. And if you kept the same job last year, you probably didn’t see a raise at all, according to the Federal Reserve Bank of Atlanta. The 2.4 percent of Americans who left their jobs for greener pastures captured most of the pay raises, 3.8 percent on average.

Still, more money is good news. Middle-class workers have famously seen little improvement in their standard of living since 1979 because on average salaries have risen at the same rate as inflation. That changed in 2015 and continued through 2017, according to the Bureau of Labor Statistics.

“Employment and wage gains continued to outpace the cost of living in 2017, and upper-middle class and middle-class Americans are seeing the benefits of the economic recovery,” according to David Deull, principal economist at IHS Markit, a market analysis firm.

The poverty rate also fell to 12.3 percent, the lowest level since the Great Recession. That’s still 40 million Americans living in horrendous conditions, though, and more than a third are children.

The lower poverty rate belies the fact that 75 percent of the jobs created since the Great Recession are low-paying. Those jobs may be better than unemployment, but few offer real opportunities for prosperity.

Another important thing to remember is the crucial qualifier: when adjusted for inflation. Wages rose only slightly between 2016 and 2017, while low energy prices pushed down inflation.

This year, inflation is up 2.2 percent, led by higher energy and housing prices. Health care inflation has slowed down, but education and auto insurance are up.

None of this should come as a surprise. The U.S. economy has been adding jobs for 94 straight months, driving the unemployment down to 3.9 percent. There are now more job openings in the U.S. than Americans looking for jobs.

This labor shortage is driving up wages, as noted above, but employers often pass these higher labor costs on to consumers. That can create a virtuous circle, for a while, as Americans spend their higher wages to buy more goods. Too much spending, though, overheats the economy and triggers damaging inflation.

This is where the Federal Reserve comes in. Businesses borrow money to expand, and consumers borrow money for homes. Borrowing and spending also drive up inflation. The Fed steps in with higher interest rates, making loans more expensive, to drive down lending and cool off the economy.

The Fed has been inching interest rates higher, trying to keep inflation at a healthy 2 percent without squelching economic growth. Most observers expect the Fed to raise interest rates again on Sept. 26.

Some economists, though, see the low unemployment number, rising inflation rate, higher interest rates and other economic indicators as signals that the Fed is slowing things down.

Geopolitical concerns over international trade and energy supply add additional risk. Texas is vulnerable because the oil and gas industry relies heavily on steel, and the state’s businesses are the nation’s most active international traders.

President Donald Trump imposed tariffs on most steel imports earlier this year, and prices from domestic producers have shot up 30 percent. The largest steel mills, U.S. Steel and Arcelor Mittal, have not shared that windfall with workers, though, and steelworkers are threatening to strike.

The future of the North American Free Trade Agreement, which supports a million Texas jobs, remains endangered as the Trump administration struggles to reach a deal with Canada. The president has also threatened more tariffs on China, Texas’ third largest trade partner.

Lastly, Texas oil companies are worried about OPEC and Russia. The Trump administration’s sanctions on Iran could remove 500,000 barrels of oil or more a day from the market, sending prices higher if other countries don’t boost production. Boosting too much, though, would collapse prices.

The U.S. economy is on its second-longest run without a recession. There are signs that it may be peaking, and there are plenty of potential triggers for a major slowdown. The latest wage report is good news, but it might also be the last hurrah.